After the rollercoaster year that was 2020, which saw markets career from the worst crash in a generation to record highs at the announcement of a Covid vaccine, we have witnessed just how unpredictable financial markets can be.
Nevertheless, in our December webinar, Gareth Lewis, Managing Director of Investment Strategy at Tilney gave us his thoughts on what 2021 might have in store, based on his detailed assessment of the events of 2020 and how they have significantly changed the investment landscape.
The investment landscape in 2021: what’s in store?
1. Phase three of the post-Covid recovery
Fears of corporate failure are likely to grow as it becomes evident that policy response has delayed, but not avoided, the failure of certain companies. In addition, while markets are currently in glass-half-full mode, linked to successful deployment of the vaccine, investors have yet to consider the effect of the reduction of fiscal measures and policy response as a result of this. Economically, we are most definitely not out of the Covid woods yet.
2.The return of inflation
Inflation has been slumbering for a prolonged period and over history it has rarely been this low. There is a growing risk of rising inflation over the next few years. Could nascent inflationary pressures undermine the case for ultra-low interest rates and further stimulus?
After the global financial crisis (GFC) QE created inflation but largely in asset prices which weren’t reflected in Consumer Price Index (CPI) data. Although a huge amount of money has already been unleashed into the economy as a result of QE, a lot of the money deployed by QE in the US is still sitting in Treasury deposit accounts. Once it starts to be unwound, it is highly probable that the weight of money being deployed and the way it is being directed by politicians will start to shift inflation up to more normal levels and investors will feel the impact of inflation on capital values.
3.The impact of US economic policy
The Biden presidency looks set to usher in a new era of fiscal policy in which increased levels of government spending will support the bottom 90% of households in the US to try and reverse the trend of the wealthy becoming ever wealthier at the expense of the majority. Fiscal policy will support politically popular policies in a way we haven’t seen before. This is not to say that equity prices won’t go up but the dynamic which has seen all of the benefits going to asset owners is changing. A similar pattern is predicted across Europe and in the UK.
4. US/China relations
In spite of Trump’s aggression, many individuals and countries approved of his stance on China and are aggrieved by China’s policies.
Biden has attacked some of things highlighted by Trump and is unlikely to be significantly more lenient in attitude towards China. The shift for future interaction will be subtle: Biden is likely to view China as a competitor rather than an enemy. The normalisation of this relationship will be significant and is one of the rare good news stories out there, particularly for investors and those living, working and investing in Asia.
5. Bonds no longer low risk
While traditionally equities have been viewed as risky assets with bonds representing a lower risk, enabling one to be offset against the other, this is no longer the case. The current yield on the 10 year Gilt and Treasury Bond is close to zero. Bonds will become increasingly volatile as a direct result of inflation rising, offering little protection and making portfolio construction more difficult than ever before. There are now fewer low risk assets capable of protecting capital in real terms today than there were during the global financial crisis. This means that there needs to be much greater focus on inflation protection in portfolios going forward.
6. Interest rates likely to rise
Over the long term interest rates will start to rise in response to inflation. This will cause the cost of capital for corporate debt to rise. The result is that businesses, and indeed individuals, with a high level of debt will start to struggle and suffer cashflow problems. The corporate sector has already clocked this and begun refinancing debt in order to lock in current low interest rates before they go up.
7. The end of hegemony of global tech?
The value of tech stocks has soared this year as a result of our dependence on tech platforms during lockdown. This outstanding performance has some of the hallmarks of a bubble (such as IPO mania, an irrational valuation of ‘concept’ stocks with minimal sales and no revenue and application of excessive leverage) although others are absent. Some of these businesses do have proven business models, strong sales and profit growth but other valuations (such as Airbnb) don’t make rational sense.
There are two big existential threats which could affect tech stocks: greater regulatory pressure (for example to break up parts of the business on anti-competition grounds) and changing tax regimes. Savvy investors need to identify areas of this sector with good cashflow which gives them a level of immunity to such changes.
Many thanks to Gareth Lewis, who certainly gave us much food for thought with the content of this webinar. His predictions for 2021 suggest that it could be time to adapt your financial planning and investment management strategies to this changed investment landscape.
If you’d like help with reviewing your financial plan, why not contact your local Infinity office to arrange a meeting with one of our highly qualified financial advisers and get your 2021 off to the best possible start?